The Securities and Exchange Commission brought charges against a retirement investment and benefits consulting firm for allegedly raising money for a fund that didn't exist. A distinction about the alleged Ponzi scheme is its clientele. Many of the victims allegedly defrauded were active and retired FBI agents.
The SEC filed a complaint against Kenneth Wayne McLeod and his F&S Asset Management Group Inc. and Federal Employee Benefits Group Inc. on June 24. (Mr. McLeod died June 22.)
When even FBI agents fall victim to investment fraud, the case shows how difficult it can be to uncover investment fraud. It also shows how better due diligence can spot trouble, a lesson many pension executives have learned through their own experience, and many still have to learn.
Also, the case shows dangers of affinity marketing through testimonials and endorsements and peer involvement.
“(Mr.) McLeod told investors that the fund's investors included 'high-level members of Congress, federal judges, and agency heads,'” according to the SEC complaint. “(Mr.) McLeod attracted many of his clients through retirement planning seminars across the country that various federal and state agencies paid him to conduct.”
Mr. McLeod “offered his clients guaranteed, tax-free returns of eight to 10% annually in the fund.”
This sales approach resembles in many ways shadow marketing, which tends to target some public and not-for-profit defined contribution plan participants and involves the use of non-professionals, often whom participants know and trust, in the selling of investment products.
Shadow or alternative marketing is a legal but disturbing practice, involving some major investment management companies. Some of these investment organizations openly pay marketing fees to the plans in exchange for their endorsement. This practice raises participants' costs in terms of fees and potentially inappropriate or underperforming investment funds.
The SEC case shows that participants, as well as plan sponsors, have to be cautious of endorsements by their peers of investment management offers. Better due diligence would likely have uncovered the alleged McLeod fraud. More time needs to go into due diligence and in seeking the type of consultants who could properly conduct such evaluation.